[matheusmoreira]

> most dollars are created not by the government, or even the Federal Reserve, but by private banks, via a mechanism which I will not pretend to fully understand

Fractional reserve banking. Basically, bankers start getting very anxious when they see the masses of people depositing mountains of cash into them. They look at the cash hoard they have suddenly amassed and think, we can't just leave this pile of cash here doing nothing, we have to efficiently allocate all of this capital. So they lend it out to people who need cash, charge interest and pay account holders their yields.

Deposit $100. Bank loans out $90, and $10 sits in its reserves. Your account still says $100, even though the bank is now leveraged against loans to third parties. Guy who took the $90 loan pays some bills, and that $90 ends up deposited right back into the same bank. So it keeps $9 and loans out $81. There is now $100 + $90 + $81 in circulation, but only that $100 is real money, the rest are all made up. They only become real when loans are repaid. So, the $81 gets spent, deposited back into the bank, and so on, and so forth, expanding the money supply like a fractal until the amounts become too infinitesimal to track. Thus $1,000 easily becomes $100,000 literally overnight. Government could run its presses 24/7 and it would not be able to outcompete the banks when it comes to inflating the money supply.

Banks are the financial call stacks of society. Better hope there aren't any exceptions (defaults), or the whole thing unwinds and comes crashing down.

It's like a society wide financial version of ISP oversubscription. The assumption is nobody is going to stress test the system by saturating the link 24/7. Everything breaks the second the invariants are violated. Banks similarly assume that not everybody will need all of their dollars immediately, which lets them "efficiently allocate" all of those dollars. Entire government systems exist just to bail out the banks where this assumption fails to be load bearing.

[neilwilson]

It's amazing this myth continues when the Bank of England debunked it in 2014. [0]

[0]: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

[matheusmoreira]

So it's no longer "reserves", it's "capital requirements", "liquidity coverage ratios" or whatever else. Banks inverted the technical language. They don't literally loan out deposits anymore, now they just create loans out of nowhere. Except they still can't create loans out of thin air unless they have actual equity to back at least a fraction of those loans. They still can't create money unless they have... reserves...? And what do you know... Deposits just happen to be the the easiest way to fund that equity account..?

Yep. Not a single change to the moral calculus here. Banks want to be as leveraged as possible. They want to risk it all: their own assets, and other people's money. And they want that risk to be subsidized by society itself. And society allows it because it's addicted to cheap credit. Loans are so thoroughly wired into people's finances at this point that weaning them off it is actually dangerous, not just politically inconvenient. So we'll keep building up and unwinding financial call stacks, and the godlike oligarchs observing and programming the system will keep profiting from the peaks and valleys while everybody else just keeps getting rekt. Nothing new here.

[neilwilson]

They never did loan out anything. It’s always been a myth propagated by people who have never been involved in banking [0]

The limits to banking are when the last creditworthy person prepared to pay the current price of money walks through the door.

[0]: https://new-wayland.com/blog/post-war-banking-policy/

[neilwilson]

Also the process is loans creates deposits creates equity.

What do you buy bank shares with? Bank deposits.

[ckw]

Can banks individually create money out of nothing? — The theories and the empirical evidence https://www.sciencedirect.com/science/article/pii/S105752191...